Uh-oh.

That was my first reaction when I read that Cisco Systems (NASDAQ:CSCO) was buying WebEx Communications (NASDAQ:WEBX) for $3.2 billion in cash.

Of course, that's not really fair. I was living and working in Silicon Valley during the heady days of the dot-com bubble. My instincts are hypersensitive when it comes to big-money tech deals, many of which were engineered by Cisco at the height of the madness.

How is WebEx different? Turns out it may not be different -- if you believe the numbers, that is:

WebEx

2006

2005

2004

2003

Return on Assets

14.6%

15.5%

18.0%

17.8%

Return on Equity

16.7%

17.9%

21.2%

22.1%

Return on Capital

12.6%

19.0%

23.2%

47.1%
Source: Capital IQ, a division of Standard & Poor's

Notice the steady decline in performance. My guess is that's due to an increasing number of competitors in Web audio and video conferencing -- a market that WebEx all but pioneered at its founding in 1995.

Then there's the valuation. At $57 a share, Cisco values WebEx at 34 times this year's normalized earnings, or double its long-term growth projected growth rate of 17%. That's an impressive premium.

Yet there are two reasons why "CisEx" makes sense to me:

  1. WebEx is still far and away the leader in Web conferencing, commanding more than 67% of its market, according to Forrester Research.
  2. Cisco hopes to be leader in "Unified Communications," which, as I see it, means CEO John Chambers hopes to remake Cisco as the AT&T (NYSE:T) of data delivery. Being the leader in Web conferencing fits with that strategy.

So, with WebEx's dominance and Cisco's long-term strategy, maybe the premium for WebEx is justified. But even if it is, history reminds us to be cautious. Cisco still has plenty of competitors in Juniper (NASDAQ:JNPR) and Avaya (NYSE:AV), and its acquire-everything-we-need strategy failed investors once before, under the same CEO. What's different this time?

Get your clicks with related Foolishness:

High tech. Biotech. Nanotech. Any tech. David Gardner and his Foolish band of analysts cover it all for Rule Breakers subscribers. As a result, they've uncovered four stocks that have at least doubled in the first two years of this market-beating service. Want to find out who they are? Click here to try the Rule Breakers free for 30 days. There's no obligation to subscribe.

Fool contributor Tim Beyers, who is ranked 996 out of more than 24,300 in our Motley Fool CAPS investor-intelligence database, didn't own shares in any of the companies mentioned in this article at the time of publication. All of his portfolio holdings can be found at Tim's Fool profile. His thoughts on tech stocks, Foolishness, and investing in general may be found in his blog. The Motley Fool's disclosure policy never calls collect.